CALGARY - Agrium Inc. (TSX:AGU) said Thursday that it has increased its target dividend payout ratio to 40 to 50 per cent of free cash flow, up from a range of 25 to 35 per cent.

"We expect our free cash flow generation to increase significantly as we complete our major production capacity expansion projects for nitrogen and potash this year," Agrium president and chief executive Chuck Magro said in a statement.

"We believe that the higher payout ratio strikes a balance between returning significant capital to shareholders, while maintaining our core assets and flexibility for growth."

Agrium most recently paid quarterly dividend of 78 cents US per common share.

The company also said Thursday it has filed a notice with regulators that it plans to buy back up to five per cent of its outstanding shares over the next year.

All of the shares purchased through the normal course issuer bid will be returned to treasury for cancellation.

By buying back shares, a company spreads its profits over fewer shares, thus increasing its return on equity and earnings per share, two key ratios used to determine its financial health and investment rating.